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How Are Different Forms Of Gold Investments Taxed? Read Here To Find Out

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A lot of you would have invested in gold this Akshay Tritiya. While traditionally people bought gold in the form of bars, coins or jewellery – physical gold still remains the oldest forms of investment, now people have increasingly begun investing in gold digitally in the form of sovereign bonds, exchange-traded funds, derivative contracts, and so on.

And why not, gold is a stable investment and also generates stable income. Also, with increasing uncertainty around situations arising out of the global pandemic, gold is becoming even more popular in the investor community. 

“With every passing day, the markets have gone unpredictable. This has reignited the investors’ faith back in traditional gold investment, which could be in the form of digital, physical, paper or even derivatives,” says Saket Patawari, executive director, indirect tax – Nexdigm, a provider of tax consulting, accounting, and business process management services for enterprises. 

That said, your investment in gold will attract taxes, and different forms of gold investments are taxed differently. “Generally, a goods and services tax (GST) of 3 per cent is payable on the cost of purchase along with making charges, while transacting in physical gold,” adds Patawari. 

So, let’s understand in detail the different tax implications on different types of gold investments

Sovereign Gold Bonds (SGBs): This is an alternative to holding physical gold, and its value is linked to the underlying value of gold as on the day of buying. Under the scheme, investors will be entitled to an interest of 2.5 per cent per annum over the holding period, which is eight years. But they will have an option to redeem it at five years on specific windows as announced by the government. 

Interest on gold bonds will be taxed under the heading income from other sources under the Income Tax Act. If bonds are redeemed, they are free from taxation.

“From the income-tax perspective, interest received on such bonds will be taxable under the head income from other sources. In the event bonds are redeemed, then the same is exempt from tax. However, if the bonds are sold after a period of five years, then gains arising on such transfer will be taxed as long-term capital gains at 20 per cent. The benefit of indexed cost of acquisition will be available to the seller of such SGBs. Non-resident Indians are not eligible to make investments in SGBs,” says Anita Basrur, partner, direct tax, Sudit K Parekh & Co. LLP, an audit and tax practice firm. 

Gold ETF/ Gold Bonds/ Gold Funds: Though the modes of investments in Gold ETF/ Gold Bonds/ Gold Funds are different, however, their taxability is the same. The liability to pay income tax shall arise on the transfer of such instruments. 

“If the instruments are held for a period of more than 36 months, then the same shall be taxed as long-term capital gains, and the benefit of indexed cost of acquisition will be available. Else, the gains will be treated as short-term capital gains, and the benefit of indexation will not be available. The tax treatment is similar in case of non-resident Indians,” adds Basrur. 

Physical Gold And Jewellery: Tax will be payable in the event the same is transferred and/or sold in the market. If the gold is held for a period of more than 36 months, then the same shall be taxed as long-term capital gains, and the benefit of indexed cost of acquisition will be available. Else, the gains will be treated as short-term capital gains, and the benefit of indexation will not be available. The tax treatment is similar for non-resident Indians.

It should also be noted that gold received as wedding gift from family and relatives, or through inheritance, is tax-free provided the value does not exceed Rs 50,000 in a year. Anything exceeding that value is to be treated as taxable in the hands of the receiver.

Even where the gold received as wedding gift or inheritance is below Rs 50,000 in value, it will be treated for tax purposes and you will be liable to pay capital gains tax when and if you decide to sell it in future. The capital gains is calculated by taking into account the holding period, i.e., when the jewellery was originally purchased, as against when it is being sold.